| COURT: | ITAT Chennai |
| CORAM: | A. Mohan Alankamony (AM), Challa Nagendra Prasad (JM) |
| SECTION(S): | 14A, Rule 8D |
| GENRE: | Domestic Tax |
| CATCH WORDS: | exempt income |
| COUNSEL: | M. Karunagaran |
| DATE: | July 31, 2014 (Date of pronouncement) |
| DATE: | August 15, 2014 (Date of publication) |
| AY: | 2009-10 |
| FILE: | Click here to download the file in pdf format |
| CITATION: | |
| S. 14A/ Rule 8D: No disallowance can be made if there is no exempt income. Cheminvest (SB) & CBDT Circular are not good law | |
In AY 2009-10, the assessee held investments worth Rs. 14.05 crore and incurred interest expenditure of Rs. 34.80 lakhs. The assessee claimed that no disallowance u/s 14A & Rule 8D could be made as the investments were made out of own funds and no income was derived from the investments. The AO rejected the claim and made a disallowance of Rs. 19.28 lakhs though the CIT(A) deleted it. Before the Tribunal the department relied on Cheminvest Ltd 121 ITD 318 (SB) & Circular No.5/2014 dated 11.2.2014 and argued that even if the assessee has not earned any exempt income, still disallowance u/s 14A read with Rule 8D has to be made and it is mandatory. HELD by the Tribunal dismissing the appeal:
No doubt in Cheminvest Ltd vs. ITO 121 ITD 318 (SB) the Special Bench of the Tribunal has held that disallowance u/s 14A can be made even in the year in which no exempt income has been earned or received by the assessee. This decision of Special Bench of the Tribunal has been impliedly overruled by the decisions of High Courts in Shivam Motors P Ltd (All HC), CIT vs. Corrtech Energy Pvt. Ltd (Guj HC), CIT vs. Delite Enterprises (Bom HC), CIT vs. Lakhani Marketing (P&H HC), CIT vs. Winsome Textiles Industries Ltd 319 ITR 204 (P&H) where it has been held that when there is no exempt income and no claim for exemption, s. 14A and Rule 8D have no application and no disallowance can be made.
No doubt if we read the provision of the section 14A then we find that if there is no exempted income there is no disallowance of expenditure. As provided in section 14A sub-section (1) that “no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of total income” ie where there is no income how can we say that the expenditure has a direct relation to exempted income. Further in most of the cases the investments were made only for business gain or for earning capital gains whether it is short term or long term which is taxable under the provisions of the Act. As hes held in above and reproduce here:
“No doubt in Cheminvest Ltd vs. ITO 121 ITD 318 (SB) the Special Bench of the Tribunal has held that disallowance u/s 14A can be made even in the year in which no exempt income has been earned or received by the assessee. This decision of Special Bench of the Tribunal has been impliedly overruled by the decisions of High Courts in Shivam Motors P Ltd (All HC), CIT vs. Corrtech Energy Pvt. Ltd (Guj HC), CIT vs. Delite Enterprises (Bom HC), CIT vs. Lakhani Marketing (P&H HC), CIT vs. Winsome Textiles Industries Ltd 319 ITR 204 (P&H) where it has been held that when there is no exempt income and no claim for exemption, s. 14A and Rule 8D have no application and no disallowance can be made.”
This section 14A was introduced in 2001 and it took good seven year to frame the rules. This itself shows the problem of implementing the section. Secondly, it was a retrospective amendment from 1961.
This section of about 3 lines has generated maximum litigation and there are various decisions interpreting it in as many ways as possible including the extreme way as in Cheminvest Ltd’s case.
This has allowed free play of interpretation when any assessment was pending whether on account of regular assessment, reassessment or appeal till insertion of Rules and even after that for reasons of applicability or otherwise of the section to a case. The assesses have to live with the decision that is the latest, when their appeal or assessment comes for hearing, or seek adjournments till a favourable decision comes along. Section 14A has forced many big assesses to provide for tax and take a hit in their profits retrospectively.
Whenever there is any mention about of retrospective amendment and how it affects the investments only Vodafone and non-residents are thought of. It is time this section, which are affecting residents, along with other sections which have retrospective effect, are scrapped and a fresh thought is given.
This section 14A was introduced in 2001 and it took good seven year to frame the rules. This itself shows the problem of implementing the section. Secondly, it was a retrospective amendment from 1961.
This section of about 3 lines has generated maximum litigation and there are various decisions interpreting it in as many ways as possible including the extreme way as in Cheminvest Ltd’s case.
This has allowed free play of interpretation when any assessment was pending whether on account of regular assessment, reassessment or appeal till insertion of Rules and even after that for reasons of applicability or otherwise of the section to a case. The assesses have to live with the decision that is the latest, when their appeal or assessment comes for hearing, or seek adjournments till a favourable decision comes along. Section 14A has forced many big assesses to provide for tax and take a hit in their profits retrospectively.
Whenever there is any mention about of retrospective amendment and how it affects the investments only Vodafone and non-residents are thought of. It is time this section, which is affecting residents, along with other sections which have retrospective effect, are scrapped and a fresh thought is given.